Casualty losses are allowed as a deduction on your tax return and are considered business or non- business losses. Because the IRS treats them differently, I will discuss non-business losses and save business losses for another segment.
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According to the IRS, a casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. So were talking car accidents, robbery, earthquake, that sort of thing. The event cannot be caused by your own volition. So if you paid someone to burn down your house, or you perpetuated the car accident in a road-rage fury, or angrily flushed your wedding rings down the toilet, then you do not have a tax- deductible incident.
The non-business loss can also not be caused by a family pet; if the new puppy chews through your $10,000 oriental rug, youre on your own. By the same token, if you accidentally break grandmas good china, you cannot deduct that loss either. It has to go down in an earthquake or fire to get the write off. Items that mysteriously disappear like money or property also do not constitute a taxable event.
Losses must also be sudden; this precludes things like dry rot, corrosion, and termite damage--anything that is progressively destructive in nature. With that said, if an infestation of locusts or beetles appears on the horizon and suddenly chews up the siding on the house, you have a deductible eventbut make sure to take pictures. A drought is not exactly a sudden event, but if it causes a loss for your trade or business, you may be able to write it off.
A loss from a Ponzi-scheme type of investment is deductible. Declaring these can be a bit tricky so you may want to check out IRS Revenue Ruling 2009-9 and 2009-14. I.R.B. 735. Go to www.irs.gov/irb/2009-14_IRB/ar07.html to get more information. And check with your tax pro, declaring the losses requires more than just filling out the form.
IRS Publication 584 provides complete details about casualty and theft losses. To take the loss, you must file Form 4864 in conjunction with either Schedule A, Schedule D, or Schedule L. Theres a lot of math involved; the loss is reduced by insurance reimbursements, then by $100, then by 10% of adjusted gross income. The remainder is the amount you are allowed to deduct on your tax return.
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It may be appropriate and possibly advantageous in certain situations to declare the loss as a capital loss on Schedule D. If this is the case, you dont need to reduce the amount of the loss as described above. However, you are allowed only $3,000 in capital losses per year ($1,500 if married filing separately). Anything in excess of this amount is carried forward to future tax years. If this scenario proves more advantageous, check with your tax pro to determine if you qualify to treat the loss in this manner.
You will need to find a way to establish the fair market value of the items lost. Appraisals, before-photos, and purchase receipts can help. You should also document the loss with photographs, police reports, witness reports and any other information to substantiate the event and to justify the amount taken as a deduction.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know, available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.